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Tag: compounding

Magic of Compounding

The “Rice grain on chess board story” is a popular analogy used to explain the power of compounding. The story goes like this: Once upon a time, a servant demands his king to offer him one grain of rice for the first square of a chessboard, two grains for the second square, four grains for the third, and so on, doubling the number of grains for each square until all 64 squares have been filled as a token of his lifelong service to his King.

At first, the king may think that the servant’s demand is not so great, as the number of grains increases slowly. But as the King moves through the chessboard, the number of grains increases exponentially. By the time they reach the 64th square, the number of grains had grown to over 18 quintillion weighing over 461 billion metric tons ! The cost of buying this much amount of rice would cost over $300 Trillion US dollars. The wealth of the entire planet would fall short if you want to buy this much amount of rice !

This story illustrates the power of compounding, which is the ability of an asset to generate returns not only on the initial investment, but also on the reinvested returns. The chessboard represents the timeline of an investment, and each square represents a year. The rice grains represent the returns on the investment, which start small but grow larger as the years go by

The key takeaway from this story is that compounding is a powerful force that can turn small investments into large sums over time. The earlier one starts to invest, the more time compounding has to work its magic. It’s important to note that, just like the story, the power of compounding takes time to work, and it’s not necessarily a get-rich-quick scheme.

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Bestseller book "Money Mindset and Math" by Shubham Saxena

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